China’s Local Financial Shortfall to Reach 6 Trillion Yuan As Housing Market Plunges: Expert Predicts

The Chinese real estate market collapsed in July with all indices falling. An expert predicts that the real estate plunge, together with the economic slowdown, will lead to a financial shortage of 6 trillion yuan (about $889.6 billion) for local governments for the year, as the local governments’ revenues from land sales may be halved this year.

Lu Ting, Nomura Securities’ Chief China Economist, penned an article on China’s top financial news outlet Caixin on July 24, pointing out that although China’s real estate sales improved in June, data in July showed that sales had once again declined. Even in June, home starts plummeted by 45 percent year-on-year, home completions fell 41 percent, land sales fell 53 percent by area and 65 percent by value.

According to a report released by Shanghai Securities on July 18, between July 4 and July 18, 3.923 million square meters of land for planned development were sold in 100 large and medium-sized cities, a cumulative year-on-year fall of 61.58 percent; and property sales in 30 large and medium-sized cities amounted to 2.42 million square meters, a cumulative year-on-year drop of 36.46 percent.

In terms of number of property sales, between July 4 and July 8, 6,237 units were sold in first-tier cities, a reduction of 36.16 percent, 9,458 units were sold in second-tier cities, a decline of 34.68 percent, and 6,040 units were sold in third-tier cities, a decrease of 43.31 percent.

Lu explained that developers delivering unfinished high-rise buildings to home buyers have become a nightmare for the buyers, and the main reason for the decline in new home sales.

On July 13, Bloomberg quoted Citigroup’s latest analysis of China real estate, which claimed that 35 real estate projects in 22 Chinese cities are either unfinished when delivered to pre-sale buyers or losing value upon completion, and the new owners have decided to stop paying home mortgages, as a way of protest.

Homebuyers in China have recently stopped mortgage payments on at least 100 projects, after moving into unfinished dwellings from cash-strapped developers. These projects are located in numerous provinces and cities in Eastern, Northern, and Southern China, including Henan, Shanxi, Jiangsu, Jiangxi, Hunan, Hubei, Guangxi, Shanxi, and other provinces. Even some of the “internet star” development projects, including a few projects that were completely sold out the first day of sales, were delivered to pre-sale buyers as uncompleted.

Lu said buyers refusing to pay their mortgages would cause the vicious cycle to worsen. Potential buyers are afraid that they may end up buying homes in buildings that are never completed; the plunge in new property sales will worsen the cash flow crisis for developers; local governments will then further tighten the pre-sale regulation, which in turn, will further worsen developers’ cash flow.

“In the end, the developers won’t have enough money to buy land, causing land prices to fall. Subsequently, home prices will fall below expectations, and new home sales will be affected,” Lu predicted.

Lu also pointed out that local governments are now cutting salaries of civil servants due to plunging land sales, as land sales used to be the largest source of revenue for the local government.

However, “civil servants are one of the primary drivers of home purchases in many small and medium-sized cities,” Lu said. “Salary cut for this group of people, coupled with an extremely high unemployment rate among young people, lead to the situation where many people are unwilling to buy homes if they need to rely on mortgages. The real estate industry will likely continue to deteriorate because of buyer hesitancy.”

Lu estimates that the local governments’ cumulative land sales revenue will decrease by about 40-50 percent this year. Based on his estimate, on the conservative side, local governments’ revenue from land sales may be 3.5 trillion yuan (about $518.9 billion) lower than the previous year. When combined with the financial impact of the recession, Lu estimates that the fiscal gap for this year could be 6 trillion yuan (about $889.6 billion).

“The real estate industry and its upstream and downstream industrial chains account for one-fourth of China’s GDP,” Lu remarked. “Therefore, if you want to analyze the future economic trend of China, it is necessary to understand the trend in real estate. For the past 20 years, whenever the economy was struggling, Chinese authorities would loosen restrictions on real estate to stimulate the demand for housing and real estate investments.”